Telework is here to stay, but what does that mean for wage tax revenue?

It’s been two years, now, since local businesses shuttered their office doors and sent employees home with laptops to telework from their living rooms—forced to do so by pandemic-induced stay-at-home-orders. It’s still unclear what the long-term impact of this novel digital-first economy will have on government tax revenue streams.

Commuter-driven revenue, such as sales tax on morning coffee, parking fees and tax on wages earned inside municipal limits—any revenue generated by people who don’t live there full-time—is a budgetary staple for many cities. When the pandemic set in, many communities were forced to slash budgets and adapt.

“Now that many of the telework policies that U.S. employers adopted out of necessity in 2020 are becoming permanent, some employees will be able to cut back or eliminate the time they spend commuting or move farther from their place of work. Fewer commuters—or workers who commute less often—could translate into a shrinking local revenue base and contribute to long-term fiscal challenges for local governments,” reads an analysis of 10 American cities and their tax-revenue risk published by The Pew Charitable Trusts. The study leverages commuter Census data to compare the tax revenue risk of Baltimore; Carson City, Nevada; Washington, D.C.; Denver; New Orleans; New York; Philadelphia; Richmond, Va.; San Francisco; and St. Louis.

A city’s level of risk depends on the types of jobs and businesses it’s home to. Those that house white collar workers—especially those in finance, management and professional industries, according to the study—could see a particularly sharp decline in revenue because those roles are aligned with remote work. In contrast, laborers in service jobs, health care and hospitality can’t complete their work from home.

Of the 10 cities included in the study, “Richmond has the highest commuter share at 77 percent. San Francisco’s is lower at 62 percent, but that city has the highest share of professional jobs, 29 percent. That data point signals potential increased fiscal risk if remote work arrangements stay in place. In contrast, Carson City’s low share of professional jobs, 7 percent, could reduce its fiscal risk,” the study says.

The evolution of telework and its impact on revenues could be profound.

“In Philadelphia, for example, wage tax revenue through January 2021 came in well below pre-pandemic forecasts. City experts attributed part of the wage tax revenue decline in the information, financial activities, and professional services sectors to the number of usual commuters who were exempt from the wage tax while working remotely,” the study says.

According to a 2021 analysis from Philidelphia’s City’s Office of the Controller, industries more likely to support remote work saw an “outsized decline” over the first year of the pandemic. While this was at least partially attributed to job losses, “telecommuting for non-residents has already had a substantial effect on the city’s finances.”

Another report from Pew Charitable Trusts on Philidelphia notes telecommuting “could have significant long-term implications for Philadelphia’s wage tax, which has produced nearly half of the city’s locally generated tax revenue in recent years.”

Beyond revenue losses, the telework-evolution and the loss of people traveling to offices poses other impact risks. Twelve of New England’s 38 transit systems, for example, “rely on directly generated revenue to cover at least one-quarter of their operating expenses. All but one of those 12 systems saw their ridership decline by more than one-half during the first year of the pandemic,” reads a brief from the Federal Reserve Bank of Boston, which is a part of the Central bank of the United States.

The shift will also reduce the demand for office space, restaurants and retail stores.

While the impact will undoubtedly be felt heavily across the board, cities that rely heavily on property taxes and those that don’t collect income or sales tax “could be more resilient to long-term shifts to remote work,” Pew’s study notes.